Insurance Overview for Office Tenants

Insurance is one of the keys to addressing the risk of casualty.  Tenants need to keep in mind and remind the landlord that they are paying for the insurance through their rent either directly as an Operating Expense or indirectly through its gross rent.  

While office leases are drafted by landlords, they impose obligations on the tenant for insurance, but are usually silent on what insurance landlords are required to carry.  Savvy tenants need to carefully review this provision with their risk managers and insurance agents to be sure they have adequate coverage as does the landlord.  Below is a quick recap of key insurance concepts that should be considered in an office lease.

  1. All Risk – insures property against loss or damage arising from any casualty with limited exceptions, i.e., Acts of War.  The policy should include 100% replacement value.
  2. Commercial General Liability – commonly carried and required of both parties.
  3. Workers Compensation – just as landlords will typically require such coverage of tenants, tenants should request same from landlords. 
  4. Business Interruption Insurance – while a requirement by landlords in many leases, it insures the tenant for the direct loss for displacement and indirect damages of loss income as a result thereof.  Tenant should carefully review their policy to see what triggers an “interruption” and be sure it is broad enough to cover the myriad reasons denying use.
  5. Rental Income Insurance – typically required by lenders and carried by almost all landlords, this protects the building’s cash flow in the event of any rent interruption.
  6. Waiver of Subrogation: What is it? Why waive it?  Subrogation means that in the event of an insured loss, the insurance company steps into the shoes of the policy holder can file a lawsuit against the party causing the loss.  While that is common in a consumer setting (i.e., auto insurance), it is waived in commercial leases to minimize duplication of insurance coverage and costs.  In other words, the parties simply look to their insurance companies for coverage and, at no cost, can obtain waivers of subrogation from their carriers.
  7. Insuring the Leasehold Improvements.  There’s not much uniformity on this issue; however, landlords should insure the leasehold improvements (for a typical office space) since the improvements belong to the landlord and it is more efficient for the landlord to cover all leasehold improvements from both a cost and implementation perspective. 
  8. Other insurance considerations.
    1. Terrorism – does the landlord’s policy cover acts of terrorism?
    2. Self Insurance – where appropriate, either party may wish to self-insure; but there needs to be a requirement that such party meets a certain net worth standard.  If not, they need to adhere to the scope of insurance coverage under the lease.  
    3. Deductibles – each party wants flexibility on deductibles, particularly national tenants where it is difficult to have one office with a different deductible, there needs to be some reasonableness as to the amount.  Tenants do not want the landlord to be able to pass-through big deductibles as part of Operating Expenses.  
    4. Insurance Company’s credentials – while landlords typically impose an A.M. Best rating requirement for tenant’s insurer, tenants should request the same of the landlord’s  insurer.
    5. Primary – whose insurance takes precedence
    6. Named Insured – additional parties – be careful of the over inclusive list.
    7. Certificate of Coverage – have your insurance agent ready to produce the certificate of insurance as required under the lease.  Likewise, the tenant may want to ask same of landlord where warranted. 
    8. Indemnification Provisions – be sure they are not too broad to contradict insurance provisions including waivers of subrogation. 

Don Wenig
Blackacre Advisors LLC

DISCLAIMER.   Our writings are from a real estate transaction perspective and for informational purposes only. Nothing herein shall be considered legal, accounting, tax, or architectural advice. Please consult with the appropriate professional(s).

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